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on Microeconomics |
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Issue of 2008‒09‒05
twelve papers chosen by Joao Carlos Correia Leitao Technical University of Lisbon |
| By: | Gerard Hoberg; Gordon M. Phillips |
| Abstract: | We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals. |
| JEL: | G3 G34 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14289&r=mic |
| By: | André van Stel; Roy Thurik; Andrew Burke |
| Abstract: | The recent work of Kim and Mauborgne (2005a) has sought to turn strategic management on its head. They note that the field has been dominated by Porter’s (1980, 1985) competitive strategy and it has placed too much emphasis on the importance of competition and rivalry. By contrast they argue in favour of an alternative strategic approach – blue ocean strategy – where firms focus on value innovation, creating consumer demand and exploiting untapped markets. So far empirical analysis in this debate has been focused on case study evidence and hence has been limited in its ability to generalise. The massive appeal of the blue ocean strategy is in stark contrast with the paucity of research testing the viability and relevance of this alternative strategic approach. In this paper we use a comprehensive data set on the Dutch retail industry in order to bring some statistical evidence to the debate. We investigate the prevalence of blue ocean versus competitive strategy in this industry over the period 1982-2000. Our results show that blue ocean strategy and competitive strategy coexist within the same competitive theoretical framework. The results highlight that the dominance of either form of strategy is not categorical but rather determined by the market conditions in which the firms operate. |
| Date: | 2008–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200801&r=mic |
| By: | Stephen Davies (Centre for Competition Policy, University of East Anglia); Matthew Olczak (Centre for Competition Policy, University of East Anglia) |
| Abstract: | Previous empirical assessments of the effectiveness of structural merger remedies have focused mainly on the subsequent viability of the divested assets. Here, we take a different approach by examining how competitive are the market structures which result from the divestments. We employ a tightly specified sample of markets in which the European Commission (EC) has imposed structural merger remedies. It has two key features: (i) it includes all mergers in which the EC appears to have seriously considered, simultaneously, the possibility of collective dominance, as well as single dominance; (ii) in a previous paper, for the same sample, we estimated a model which proved very successful in predicting the Commission’s merger decisions, in terms of the market shares of the leading firms. The former allows us to explore the choices between alternative theories of harm, and the latter provides a yardstick for evaluating whether markets are competitive or not – at least in the eyes of the Commission. Running the hypothetical post-remedy market shares through the model, we can predict whether the EC would have judged the markets concerned to be competitive, had they been the result of a merger rather than a remedy. We find that a significant proportion were not competitive in this sense. One explanation is that the EC has simply been inconsistent – using different criteria for assessing remedies from those for assessing the mergers in the first place. However, a more sympathetic – and in our opinion, more likely – explanation is that the Commission is severely constrained by the pre-merger market structures in many markets. We show that, typically, divestment remedies return the market to the same structure as existed before the proposed merger. Indeed, one can argue that any competition authority should never do more than this. Crucially, however, we find that this pre-merger structure is often itself not competitive. We also observe an analogous picture in a number of markets where the Commission chose not to intervene: while the post-merger structure was not competitive, nor was the pre-merger structure. In those cases, however, the Commission preferred the former to the latter. In effect, in both scenarios, the EC was faced with a no-win decision. This immediately raises a follow-up question: why did the EC intervene for some, but not for others – given that in all these cases, some sort of anticompetitive structure would prevail? We show that, in this sample at least, the answer is often tied to the prospective rank of the merged firm post-merger. In particular, in those markets where the merged firm would not be the largest post-merger, we find a reluctance to intervene even where the resulting market structure is likely to be conducive to collective dominance. We explain this by a willingness to tolerate an outcome which may be conducive to tacit collusion if the alternative is the possibility of an enhanced position of single dominance by the market leader. Finally, because the sample is confined to cases brought under the ‘old’ EC Merger Regulation, we go on to consider how, if at all, these conclusions require qualification following the 2004 revisions, which, amongst other things, made interventions for non-coordinated behaviour possible without requiring that the merged firm be a dominant market leader. Our main conclusions here are that the Commission appears to have been less inclined to intervene in general, but particularly for Collective Dominance (or ‘coordinated effects’ as it is now known in Europe as well as the US.) Moreover, perhaps contrary to expectation, where the merged firm is #2, the Commission has to date rarely made a unilateral effects decision and never made a coordinated effects decision. |
| Keywords: | tacit collusion, collective dominance, single dominance, coordinated effects, merger remedies |
| JEL: | L13 L41 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp08-28&r=mic |
| By: | André van Stel; Andrew Burke |
| Abstract: | Despite the fact that the main contribution of entrepreneurship theory to economics has been to provide an account of the performance of markets in disequilibrium, little empirical research on entrepreneurship has examined firm entry and exit in this context. In this paper, we attempt to redress this by modelling the interrelationship between firm entry and exit rates in disequilibrium. Using a data base of Dutch retail industries over the period 1980-2001, we are able to distinguish between displacement (entry causing exit) and replacement (exit causing entry) effects. We introduce a new methodological approach which allows us to investigate whether the relations under consideration differ between situations of undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that the equilibriumrestoring mechanisms are different in these two situations – being faster in over than undershoots. Our estimation results also imply that for undershooting, a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshooting competition induced by new firms (in particular strong displacement) causes the number of firms to move towards equilibrium. The research helps to embed entrepreneurship theory into mainstream economics in a manner that adds greater insight into the performance of markets in disequilibrium. |
| Date: | 2008–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200809&r=mic |
| By: | Newbery, D. |
| Abstract: | The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship. |
| Keywords: | Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power |
| JEL: | D43 K21 L94 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0837&r=mic |
| By: | Brunekreeft, G. |
| Abstract: | This paper presents a social cost benefit analysis of ownership unbundling (as compared to legal und functional unbundling) of the electricity transmission system operators in Germany. The study relies on the Residual Supply Index for its competitive concept. The analysis models some 15 effects, grouped in three categories: the competition effect, the interconnector effect and the cost effect. Facing a looming capacity shortage, we find that the total available generation capacity and the effect of unbundling on capacity are of crucial importance. Overall, for the base-case, the net weighted discounted social-cost-benefit effect (weighted-?SCB) is likely to be positive, but small. |
| Keywords: | unbundling, electricity, networks, regulation, competition |
| JEL: | L11 L50 L94 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0833&r=mic |
| By: | Peschl, Markus F.; Fundneider, Thomas |
| Abstract: | Innovation has become one of the most important issues in modern knowledge society. As opposed to radical innovation this paper introduces the concept of Emergent Innovation: this approach tries to balance and integrate the demand both for radically new knowledge and at the same time for an organic development from within the organization. From a more general perspective one can boil down this problem to the question of how to cope with the new and with profound change (in knowledge). This question will be dealt with in the first part of the paper. As an implication the alternative approach of Emergent Innovation will be presented in the second part: this approach looks at innovation as a socio-epistemological process of “learning from the future” in order to create (radically) new knowledge in a sustainable and “organic” manner. Implications for knowledge society will be discussed. |
| Keywords: | Knowledge society; (radical vs. incremental) innovation; emergent innovation; knowledge creation; change |
| JEL: | Q55 O32 D83 O31 O3 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10215&r=mic |
| By: | Ernst Fehr; Martin Brown; Christian Zehnder |
| Abstract: | We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. |
| Keywords: | Reputation, Reciprocity, Relational Contracts, Price Rigidity, Wage Rigidity |
| JEL: | D82 J3 J41 E24 C9 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:384&r=mic |
| By: | Nillesen, P.; Pollitt, M.G. |
| Abstract: | New Zealand is the only country to date to have implemented forced ownership unbundling of electricity distribution from the rest of the electricity supply industry (in 1998). This paper examines the impact of this policy on electricity prices, quality of service and costs. We find that ownership unbundling did not achieve its objectives of facilitating greater competition in the electricity supply industry but that it did lead to lower costs and higher quality of service. We suggest that this experience indicates the potential benefits of ownership unbundling in Europe but also the danger of un-intended consequences. |
| Keywords: | electricity distribution, ownership unbundling, New Zealand |
| JEL: | L94 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0836&r=mic |
| By: | Lisa R. Anderson (Department of Economics, College of William and Mary); Beth A. Freeborn (Department of Economics, College of William and Mary) |
| Abstract: | We experimentally test a rent seeking model under five levels of competition. At one extreme, a subject’s probability of winning a prize is equal to her share of the total expenditures. At lower levels of competition, a subject’s probability of winning is affected more by her own expenditures than by the expenditures of others. Predicted expenditure levels are positively associated with higher levels of competition. Consistent with previous rent seeking experiments, we find that subjects spend significantly more than the Nash equilibrium prediction at all levels of competition. However, expenditure patterns generally follow the Nash prediction; expenditures decrease as the level of competition decreases. Our experimental design also includes a lottery choice experiment to control for subjects’ risk preference. We find that subjects who are more risk averse spend significantly less in the contest and this effect is particularly strong for female subjects |
| Keywords: | rent seeking, experiment, rent dissipation, political competition |
| JEL: | C9 D72 |
| Date: | 2008–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:75&r=mic |
| By: | Gallice, Andrea |
| Abstract: | We present an endogenous timing game of action commitment in which players can steal from each other parts of a homogeneous and perfectly divisible pie (market). We show how the incentives to preempt or to follow the rivals radically change with the number of players involved in the game. In the course of the analysis we also introduce, discuss and apply the concept of pu-dominance, a generalization of the risk-dominance criterion to games with more than two players. |
| Keywords: | Stealing; endogenous timing games; pu-dominance |
| JEL: | C72 C73 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10256&r=mic |
| By: | Werner Hölzl (WIFO) |
| Abstract: | This paper studies the R&D behaviour of fast growing SMEs using CIS III data for 16 countries. We group the countries into three groups that roughly have the same position in technological development. The first finding is that R&D is more important to high growth SMEs in countries that are closer to the technological frontier. The second finding is that high growth SMEs are more innovative than non-high-growth SMEs only for countries close to the technological frontier. This suggests that gazelles derive much of their drive from the exploitation of comparative advantages. From a policy perspective this suggests that there are important limits to centralise policies that aim at fostering high growth SMEs. |
| Keywords: | R&D, high growth firms, Europe, CIS |
| Date: | 2008–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2008:i:327&r=mic |